Italian Bank Profit Tax Sparks €10 Billion Market Value Slide, FTSE MIB Dips 2.6%

Italian stocks took a hit as an unexpected new tax on bank profits rattled the nation’s financial institutions, resulting in a considerable decline in the collective market value by up to €10 billion ($11 billion).

The FTSE MIB index in Italy experienced a 2.6% drop, driven by substantial falls in UniCredit SpA, which plummeted 7%, and Intesa Sanpaolo SpA, which sank 8%.

In the broader context of European markets, the Stoxx Europe 600 index also suffered a 0.7% dip as of 12:48 p.m. in London. On a contrasting note, Novo Nordisk’s shares surged to an all-time high following reports that Wegovy had managed to reduce heart risk by 20% in a specific trial.

This Italian tax imposition was discreetly integrated into an extensive range of measures encompassing areas from taxi licensing to foreign investment. The tax is projected to generate over €2 billion ($2.2 billion) in government revenue, according to Ansa newswire.

Italy has sanctioned a “40% appropriation of banks’ multi-billion euro surplus profits” for the year 2023, earmarked for funding tax reductions and facilitating mortgages for first-time homeowners.

Stephanie Niven, a portfolio manager at London-based investment firm Ninety One, said, “Italy’s action is among the numerous indicators of a heightened scrutiny of businesses for the broader consequences of their operations and their societal impact.”

She further commented, “One challenge with banks has been their prioritization of shareholder returns, which is met with reservations considering the assistance they’ve received in the past. Governments are keen on preventing an exclusive distribution of excess capital to shareholders.”

Analysts at Citigroup Inc. calculated that the tax equates to roughly 19% of banks’ net income in 2023, about 3% of their tangible book value for the same year, and approximately 0.5% of their risk-weighted assets in 2023. Bloomberg Intelligence experts projected that the 2023 net income of Italian lenders could face a reduction of about 10%.

“Financials represent over 30% of the Italian stock market, rendering it exposed to the freshly approved levy,” noted Leonardo Pellandini, an equity strategist at Bank Julius Baer. He added, “While banks have enjoyed a strong year due to elevated net interest margins from increased rates, a period of healthy consolidation appears warranted.”

The Italian tax policy contributes a new element of adversity for European stocks. The previous week saw the first surge of volatility in European markets in quite some time, fueled by speculation about forthcoming interest rate hikes impacting economic growth.

Lingering concerns over China’s weak trade data and a cautionary note from Moody’s Investors Service regarding the state of U.S. banks also cast a shadow on investor sentiment on Tuesday.

Among other noteworthy stock movements on Tuesday, Glencore Plc reported a substantial profit decline, causing a dip in its share value. Abrdn Plc also experienced a decline in the wake of first-half results that highlighted significant client withdrawals from the asset manager’s funds.